Stupid Investment of the Week

Commentary: This life insurance policy is a grave mistake

BOSTON (MarketWatch) -- The pitch was simple and compelling, coming as it did right after the turn of the year with resolutions on so many people's minds. It said that "$1 buys $50,000 in life insurance."

And if getting insurance was on your to-do list for the new year, you might check out the email blast from Globe Life and Accident Insurance Co. of Oklahoma City. A few clicks later -- with no medical exam or significant questions at all -- you've finished your financial chore, added protection to your family, and made the Stupid Investment of the Week.

Stupid Investment of the Week highlights the concerns and conditions that make a security less than ideal for the average consumer. Technically and legally, insurance is not considered an investment, even though many consumers use it as such. That said, because it represents the outlay of capital with the expectation of a return -- namely financial protection and peace of mind when the policy is in force -- it qualifies for the purposes of this column.

Moreover, the policy from Globe Life -- featured in many places, including an email sent to millions of America Online subscribers because the company is an "AOL Partner" -- shows why even the most simple term policy can be a bad choice.

A big part of the problem is that this is the simplest insurance policy -- as easy as anything on the market. A few clicks of the mouse, a few keystrokes, and you have your coverage, with virtually no questions asked.

Globe Life -- which also sells children's life insurance that was previously featured as a Stupid Investment of the Week -- is selling a bare-bones term life insurance policy. No cash value builds up on the policy, ever (one reason why, technically, it is not an investment). It's just a straight pay-the-premium, get-paid-if-you-die protection. There's no medical exam, and the company is not going to turn you away so long as you pay your premium, which will be $1 for the first month, and based on your age, the state you live in, and other characteristics after that.

Not-so-fine print

There is some appeal to plain-vanilla term coverage -- without the savings and investment features that can drive up policy costs -- where your protection can't go down for as long as you pay the premiums and keep the policy current.

Dig deeper, however, and you find the spots where that appeal turns ugly.

When you buy a one-size-fits-all insurance policy -- where the company is agreeing to cover everyone who clicks on an email, calls its phone line or responds to a marketing pitch -- you're going to get a high-cost policy. The underwriting and actuarial assumption is that you wouldn't take on this kind of coverage if you could save significant bucks elsewhere; thus, you are treated -- and your policy is priced -- as if you have significant health risks.

The Globe Life policy is true term coverage, and the term ends when you hit 80 years of age. In other words, if you live past your 80th birthday, you and your heirs get nothing. Unlike a policy that stays in place indefinitely, so long as premiums are paid, this means there is no guarantee of a death benefit.

In fact, it makes the policy less valuable every month when you have to pay the premium. While the Globe coverage might work for someone in their 50s, the closer that person gets to 80, the less likely they are to receive a payoff, the more likely they are just to let the policy lapse.

You won't find that in the paperwork. In fact, if you respond to Globe Life with questions about things like cash-value or the length of the term, you may find -- as I did -- that the processing center operators ask you to call customer service to get an answer.

Pay up

Then there's the pricing.

Small-dollar coverage tends to be expensive, and plenty of companies won't issue $1,000 to $50,000 policies. Consumers will often find that they're much better off -- on a dollar-for-dollar-of-coverage basis -- buying twice as much protection, as the costs of moving from a $50,000 policy to a $100,000 one are often small.

The Globe Life coverage would cost $56.49 per month for a 50-year-old male non-smoker. I found a few other policies that cost $48 to $50 per month, meaning the cost edge of going elsewhere was no more than about $100 per year. Half of that difference is made up by that first-month discount to $1, but it will add up in time. More importantly, some of the cheaper policies built up cash value, guaranteeing a payout in the end. That's where the real differences lie.

But the savings would be much bigger for someone who answers more questions or takes a real medical exam. Dave Bohannon, president of Consultants Corner, a Louisville, Ken.-based insurance advisory firm, notes that many people avoid the medical exam based on the worries that their parents had. In times past, a heart problem was a sure red flag; today, heart or cholesterol medication shows that the problem is under control and doesn't raise costs by much, if anything.

In addition, Bohannon noted, many people can get this kind of coverage from companies they already know and work with.

"Most individuals can qualify for smaller amounts of coverage," Bohannon said. "If they are employed, usually the group term coverage will offer additional amounts they can buy at a very good price. If not employed, [they can] simply type in life insurance on a search engine and there will hundreds of sites to obtain quotes."

Bohannon added that some affinity groups -- alumni associations, membership groups and others -- offer insurance, although he warned against buying the standard, pre-packaged one-size-fits-all policies from those groups, lest you wind up with the same basic problems found in the Globe Life coverage.

The moral of the story: Life insurance isn't a quick-fix purchase. The terms and conditions need to be examined and considered carefully. It's not an impulse buy, where a month or a quarter's worth of free premiums get a consumer to take their eye off a lifetime of higher costs.

Check your options. In the unlikely case that the best deal is the big, broad pitch being promoted by email or in a television ad, it will still be there for you when the rest of your search is done.

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